Fitch affirms PHL’s investment grade

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The debt watcher cited robust overall economic activity but flagged quickening inflation, fast growth in bank lending and a growing trade gap as possible symptoms of overheating. -- AFP

By Melissa Luz T. Lopez
Senior Reporter

FITCH RATINGS has kept its credit rating for the Philippines a notch above minimum investment grade amid strong growth prospects, even as it flagged rising inflation, rapid bank lending and a growing trade gap that could signal overheating risks.

Fitch on Wednesday affirmed the Philippines at “BBB” with a “stable” outlook, steady from the debt watcher’s December upgrade that placed the country one notch above minimum investment grade. This matches the rating given by major credit raters Moody’s Investors Service and S&P Global Ratings.

In a statement, Fitch said the ratings balance a “favorable” growth outlook and modest debt burden against a lower per-capita income and “weaker governance and business environment indicators,” compared to similarly rated economies.

Fitch sees Philippine gross domestic product (GDP) growing 6.8% this year, which if realized will pick up from 2017’s 6.7% but fall short of the government’s 7-8% target. The pace is expected to be sustained annually till 2020 on the back of robust domestic demand to maintain the country’s status as a growth leader in Asia.

Maintaining investment-grade rating helps cut borrowing costs for the economy, as it lowers the risk premiums on loans extended to the Philippines. The “stable” tag means current conditions support the country’s rating over the next year.

“Strong macroeconomic performance remains a rating strength, notwithstanding overheating risks,” Fitch said.

“[T]he agency believes the economy faces some overheating risks — evident from a recent rise in inflation, rapid credit growth and a widening trade deficit — although steps taken by the Bangko Sentral ng Pilipinas (BSP) to tighten monetary policy may contain these risks.”

Inflation hit a fresh five-year peak of 5.2% in June that brought last semester’s average to 4.3%, well above the central bank’s 2-4% target band. The pace is seen to rise further in July-September before easing later this year.

Economic officials welcomed the rating affirmation, although the central bank disputed overheating concerns.

A statement from the government’s Investor Relations Office said strong growth can take place without “runaway” inflation, as infrastructure investments should boost overall productive capacity.

The BSP introduced back-to-back rate hikes of 25 basis points (bp) each in its May and June meetings to rein in inflation pressures, which brought benchmark rates to 3-4%. A number of economists now say that another rate increase is on the table in August, with some even betting on a one-step 50-bp hike.

Fitch sees full-year inflation averaging 4.4%, well above target but slower than the BSP’s downgraded 4.5% forecast average.

“The one-off impact of the tax hikes is likely to dissipate in 2019, and therefore we expect average inflation to fall to around 3.8% in 2019,” the credit rater added, even as it said that the new tax law’s enactment signaled the government’s “commitment to reform.”

Starting Jan. 1, Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) Act, reduced personal income tax rates for those earning below P2 million and simplified donor and estate taxes. Foregone revenues are offset by the removal of some exemptions from value-added tax; increased tax rates for fuel, automobiles, tobacco, coal, minerals, documentary stamps, foreign currency deposit units, capital gains for stocks not in the stock exchange, and stock transactions; and new taxes for sugar-sweetened drinks and cosmetic surgery.

As of May, state revenues were up 19% from last year and continue to beat targets.

With TRAIN, Fitch sees state revenues rising to an equivalent of 16.2% of GDP this year and 16.7% in 2019, from 15.6% last year. This should support fiscal stability even as the government ramps up spending on infrastructure, and will keep the budget deficit within the programmed three percent of GDP.

At the same time, the debt watcher flagged that the recent Supreme Court decision requiring the national government to allocate a bigger share of tax collections to local governments may “put upward pressure” on general government debt and pose as a challenge for managing public finances.

On trade, Fitch sees a wider but still manageable current account deficit this year amid a continued imports surge. Inflows from worker remittances and business outsourcing will offset these outbound flows and keep the gap at 1.1% of GDP.

Strong foreign investment inflows, a stable banking system and robust dollar reserves also lend further strength to the economy at a time of uncertainties, Fitch said, even as rising global interest rates and the persistent trade gap keep the peso weaker against the dollar.

Fitch also cited the country’s weaknesses in terms of business climate and human development. It flagged that a reversal of reforms and instability in the financial system could pull the country’s ratings down. Continued strong growth, stronger governance standards and a sustained pickup in tax collections, on the other hand, could help improve ratings.